Starting from a reflection on the absence of satisfactory post-crisis economic corrective measures and on the strong disparities between the exponents of the principal economic theories, this article proposes two lines of thought regarding the complex question: “Why has economic science been unable to predict and respond to the crisis?”
[dropcap]F[/dropcap]ive years on from the onset of the 2008 crisis the western world has not managed to propose a decisive economic political model. The economic debate has been heated, even stimulating, yet inconclusive and confused.
Restricting the summary of the debate to the Italian situation, it is shown that whilst Germany and the ECB supported and sponsored Mario Monti’s politics of austerity, Gustavo Piga keenly sought to explain its relative recessive character: it was not adapted to reduce the public debt/GDP ratio, and Wolfgang Münchau wrote in the Financial Times “Why Monti is not the right man to lead Italy.” Alberto Alesina and Francesco Giavazzi are also discordant voices, maintaining that the error does not lie with the politics of austerity per se, but the way in which it has been implemented: spending needed to be cut rather than taxes raised. The orchestra of soloists has a single shared score, sadly titled ‘The worst has passed but the recovery will be slow.’ In the meantime, the European Central Bank has stated that rates of unemployment have reached previously unprecedented levels in 2013, whilst Bankitalia has announced that the GDP will fall by 1% over the course of this year.
Why has economic science been unable to predict and respond to the crisis? This question is obviously complex. The present article limits itself to give two widely overlooked responses within the debate which, in the opinion of the writer of this article are, however, fundamental. The first response is structural, insofar as it concerns the essence of economic science itself and its characteristics. The second conversely makes reference to a relatively recent and hopefully correctable phenomenon.
1. Whether we like it or not, the predictive ability of economic models is limited. Fornino notes that economic sciences, unlike natural sciences, interact with their object of study, thus impairing their accuracy in the moment in which implemented predictions direct agents’ choices. If for example, proving by contradiction, an economic model were able to predict the exact trend of every variable of interest, all the economic agents would want to profit from the informative advantage and would sell or buy according to the expected price. It would, however, be the very same shared and simultaneous action of all the agents to make the predictions inexact. Furthermore, due to practical and ethical reasons, often it is not possible for economic science to test its own models through appropriate experiment: would an experiment aimed at assessing the effects of a politics of austerity be conceivable?
2. Secondly, a growing separation has developed between political decisions and economic science. Research centres produce countless abstract studies, where in several cases the greatest contribution is to be found in the possibility of the insertion of a new publication in the author’s curriculum vitae. The debate between economists often culminates in fierce discussion on topics unknown to most, to justify the variable instrumental choice, or to discuss the dataset, or even the ways to evade potential endogeneity problems. Citing Dani Rodrik on this matter:
“Professors at the top universities distinguish themselves today not by being right about the real world, but by devising imaginative theoretical twists or developing novel evidence. If these skills also render them perceptive observers of real societies and provide them with sound judgment, it is hardly by design.”
On the contrary, in the recent Italian electoral campaign the central theme of economic politics to be implemented following the crisis has been marginal, and the opinions of several of the most influential parties have been elusive, to say the least. Let us be clear, the problem is not the empirical research in itself, or the data or the techniques used. The problem arises in the degree to which technique and technicalities precede ideas of economic politics. The few ideas in circulation remain marginal in the political debate due to their abstruse or politically inconvenient nature.
Historically, above all in periods of post-crisis, politics has found its primary ally in economic science. To support Roosevelt’s New Deal there had been Keynesian economic politics, whilst the influence of Fridmaniano’s economic thinking and the Chicago school on the choices of the British government under Margaret Thatcher and of the US government under Ronald Reagan is evident. Today, unprecedented western macro-problems, linked primarily to financial and labour markets, are affiliated with the old ideological clash between neo-Keynesians and neo-Classicists, as well as a little-appreciated, severe and aristocratic academic debate.
One of the few positive aspects of the economic crisis, as recalled by Monacelli, is that it conveys to us the complexity of understanding economic problems, which is essential and requires a capacity for extensive analysis. In the light of this, due to the recent failures of economic science and its own incapacity to provide and communicate comprehensive responses to the crisis, I believe that a slice of humble pie is required.
Returning to the two proposed responses, the pressing necessity for post-crisis economic corrective measures renders only the first still sustainable. The limits of the economic models are, indeed, structural, and economic science has reached sufficient maturity to recognise and address the practical and ethical shortcomings which characterise it. Rodrik, for example, confirms that the economy, unlike natural sciences, rarely produces definitive results, as every economic reasoning is contextual. All economic propositions are “if-then.” Consequently, understanding which remedy would function best in a particular context is a craft rather than an exact science.
I believe however, passing to the second reflection, that today like never before it is necessary for the economy to return to its direction of political-governmental choices. Accordingly, it is fundamental to preserve correct and scientifically valid methodologies, to not lose ourselves in useless attempts at academic elegance and to remember to construct the means, rather than the end. Krugman maintains that the problem does not rest with economic theory, but rather with economic politics; the undersigned would add that the problem lies in the manifest incapacity for dialogue between the two.
Original Article: Un bagno d’umiltà per la scienza economica
Translated by Lois Bond
Photo credit: infomatique